So often rich people receive attacks for not “paying their fair share” or for being “greedy” like Scrooge in A Christmas Carol. And there are many who are greedy.
However, many rich people are the ones providing jobs, housing, and other assets that society needs. And for taking risks, they get rewarded by the tax man.
Leverage the Tax Laws
The rich use leverage more so than the poor and middle class – the leverage of the tax laws. Leverage is simply the ability to do more with less. And the tax laws they use aren’t just for the silver-spooned and well-healed.
They are available to anyone willing to learn about them.
With the spread of the internet, ignorance is no longer an excuse for not being able to “get ahead” because of knowledge only a few can afford to get: you can go to IRS.gov and look up the tax laws yourself.
1031 Tax-Deferred Exchange
The greatest tax trick of the rich is using a part of the tax code called a 1031 Tax-Deferred Exchange. This tax law allows an investor to defer paying capital gains taxes when any money made is rolled over into a “like-kind” exchange. An example would be exchanging a 3 unit apartment building for an 8 unit apartment building.
There is one gotcha though – this mostly applies to real estate. It does not apply to stocks, bonds, notes, and most other assets. Here is a link to an article from the IRS on what qualifies: 1031 Exchange. And here is a resource page with more information about Real Estate 1031 Tax-Deferred Exchanges.
By rolling over capital gains, you can increase your cash flow for life, compounding your returns tax-deferred. There is nothing saying you must sell any of the properties ever (which would cause you to have to pay taxes on your gains) – so you can continue deferring taxes indefinitely so long as you continue to roll it over into more property. You could die without paying taxes on these investments!
The same cannot be said for 401(k)’s and IRA’s. These tax-deferred accounts are taxed at Ordinary Income tax rates when the money is pulled out of them. And currently, 401(k)s and IRAs are subject to an early withdrawal penalty if they are taken out before age 59.5…and to make it even worse, a part of the portfolio must be sold by age 70.5.
Commit to learning more about taxes and seek out a qualified CPA. Taxes are one of your greatest lifetime expenses – learn to reduce them legally and you’ll be far richer.
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